Return expectations: 2022 edition

How much can you expect to make on your investments over the next 10 years?

Just like last year’s edition, this post aims to answer the question of what sorts of returns UK-based investors can expect over the next decade.

I’ve collected 10-year equity return forecasts from as many (reliable) sources as I could find – 16 in total – and adjusted them for sterling-based investors.

As well as providing data for 10-year returns, I’ve also included a section for long-term return expectations, based on data going back to 1870. For those with a multi-decade time horizon, this gives an indicator of what returns equity investors might receive over the much longer term.

Expected returns

Without further ado, the expected 10 year returns are below. Returns are in sterling, are nominal (i.e. haven’t had inflation deducted), are as at 31^st December 2021, and represent the returns for a global market-cap weighted portfolio.

A few thoughts:

• The median result is a 10-year expected return of 4.9%, meaning UK investors can expect around 5% annualised nominal returns from a global equity portfolio over the next 10 years, on average.
• Most forecasts tend to fall within the 4% – 6.5% range.
• GMO are the clear outliers yet again, predicting -2.6% annualised returns. But that’s not really a surprise given they’re famously bearish every single year. One day they’ll be right.

It’s always useful to think of expected returns in ranges – you never get “average” returns, especially in the equity markets. Helpfully five of the sixteen sources included ranges around their return forecasts. I’ve included them in the chart below, taking the median of the forecast returns at each quartile. You can see the 4.9% median return for 2022 is the median from the previous chart.

Overall, return prospects don’t seem to have changed much since last year for returns. This makes sense, given valuations remain high, particularly in the US which makes up c.60% of the global market.

The median expected return stays almost exactly the same at 4.9%, but with slight inward revisions at the tail ends (5^th and 95^th percentiles).

In terms of what that means for more balanced investors, we can infer (with a much higher level of confidence than with equity returns) the returns from government bonds based on their current yields. For those who’d like to dive into the detail on how it’s much easier to forecast bond returns, see this post: ‘How to predict bond returns‘.

With yields on UK government bond funds standing at just over 1%, that paints the following picture for varying levels of equity/bond allocations:

Given the low expected returns for both equities and bonds (equities due to high valuations and bonds due to low yields), returns are lower across the board.

Balanced investors with a traditional 60%/40% equity/bond split can expect roughly 3.5% annualised returns over the next 10 years, likely falling somewhere between 2.5% and 5%.

Again, these are just estimates, but comparing this to much longer-term historic returns of around 6%-7% on a real basis (see the ‘Long-term return expectations’ section below), the main takeaway is that investors should be tempering their expectations for what they can expect from the equity markets over the next decade.

For those investors who want to tilt their portfolio to take advantage of lower valuations in specific regions, all sources expected higher returns from Emerging Markets and Europe over the US (although this obviously comes with higher risk). High relative valuations in the US are likely the main drag on returns for global investors.

Fees

Remember, all these expected returns assume no fees.

I won’t bang on about it again here, because I’m sure everyone’s heard more than enough of it by now. I’ll just say that with returns so low, it’s more important than ever to keep fees low.

As we saw in this post, fees are the best predictor of future returns, and luckily they’re also one of the very few things we have control over. Given returns are likely to be lower going forward, keeping fees low ensures you keep a larger slice of your returns.

How reliable are 10-year return forecasts?

It’s true that the vast majority investment forecasts aren’t worth listening to.

One day I’ll get round to writing up the hundreds of pages of notes I’ve collected on exactly how useless most forecasts are. And this return forecast should be treated with an equally healthy dose of scepticism.

So what am I doing?

Although most forecasts spouted by CNBC pundits, macroeconomists, and other “often-wrong-but-never-in-doubt” gurus have little evidence to support them, there’s a surprisingly large amount of evidence behind the relationship between starting valuations and subsequent 10-year returns. So it’s at least worth considering.

Although equity returns are completely unpredictable over the short term, in the longer term (around 10 years), returns become increasingly predictable as they become a function of starting valuations. Expensive markets with high valuations tend to have lower returns over the next 10 years, and cheaper markets with lower valuations tend to have higher returns.

The details of the relationship between starting valuations and returns will be the subject of a later (multi-part) post, and although the correlation is about as strong as we can hope for in investing, the relationship is still far from perfect. Not only is there considerable variation around expected returns, but attempting to use country/regional valuations as a means of generating alpha has been repeated proven to be futile.

What these return expectations are useful for is giving a good ballpark idea of whether returns are likely to be higher or lower than we’ve seen in the past.

They can serve as a useful starting point for setting expectations around the range of returns your investments are likely to generate. This in turn is useful for setting expectations around how much you’ll need to save, how long you’ll need to work for, and how much future spending can be facilitated by your portfolio.

Long-term return expectations

These returns are relevant for investor looking over the next decade. But for those lucky enough to have multi-decade horizons, the impact of starting valuations becomes more diluted, so longer-term historical average returns are likely to matter more for returns.

Over the very long-term, using one data source from 1870 and one from 1900, real returns for equities are in the region of 5% – 7%.

Investors hoping to achieve these sorts of returns over the next decade are likely to be sorely disappointed. But those with longer, multi-decade, time horizons may well see some reversion to longer-term averages, which are much more optimistic than for the next decade.

Methodology

• Returns from all sources were converted to a global equity return – weighting US, non-US, and EM returns by MSCI ACWI weights where a general ‘global equity’ return wasn’t provided.
• All real returns were adjusted to nominal returns by adding back any assumed inflation.
• Non-sterling returns were converted to GBP where only USD returns were given, using an average conversion rate backed out from sources where comparable USD and GBP returns were given.
• Each estimated quartile return was calculated by taking the median quartile returns of all sources (NB: not all sources provided data by quartile).

Data

Data for long-term real returns: